What will the Apprenticeship Levy mean for your business?
In the 2015 Autumn Statement, the Government announced its intention to introduce an ‘apprenticeship levy’ to facilitate increased numbers of…
In the November 2015 Autumn Statement, the Government announced its intention to introduce an 'apprenticeship levy' to fund and facilitate increased numbers of apprenticeships in the UK. For many organisations the impact on budgeting, recruitment and workforce planning will be huge.
The draft legislation that will bring the scheme into effect was published on 4 February 2016 along with a policy paper on the apprenticeship levy. However there are still many questions to be answered.
What is the apprenticeship levy?
The apprenticeship levy is essentially a 'payroll tax' set at 0.5% of an employer's total wage bill. The levy is payable regardless of whether the business currently has or intends to have any apprentices.
When and how is the levy paid?
The levy comes into force on 6 April 2017 and will be paid through PAYE. However, further regulations will make provision about the times at which payments are to be made and the precise mechanics of payment. The draft regulations make clear that employers will not be permitted to make any deductions in respect of the levy from the wages of apprentices or other employees or workers.
Who must pay the levy?
The levy will apply to both the private and public sectors. All employers will receive an annual allowance of £15,000 to offset the levy. This effectively means that any employer in the UK with a payroll of over £3million per annum will be subject to the payment. This figure will be calculated on the basis of total gross earnings, not including other payments such as benefits in kind.
According to Government estimates this means that just 2% of UK employers (or 200,000 organisations) will pay the levy, while the remaining 98% will pay nothing at all.
Consequently, many headlines have held that only 'big business' will be affected. However the new charge will also hit many medium sized organisations. For example, the consultation response document explains that a business with 200 employees on an average salary of £25,000 would be liable for an annual levy payment of £10,000. Arguably such an organisation falls firmly in the middle ground of British business.
The new draft regulations clearly state that 'connected companies' will only receive one levy allowance for the tax year and are free to decide which of the connected companies will take advantage of it. Essentially, companies are 'connected' if one has control of the other or they are under the control of the same person or persons.
It is important to note that the Government also proposes to introduce a target for public sector bodies of a number of apprenticeship starts per year equivalent to 2.3% of employee headcount. It is proposed that public bodies will be required to report on progress towards this target and explain any reasons why the threshold is not being met.
What will my business get back?
Contributing employers will be allocated funding via a 'digital voucher' system to allow them to purchase 'off the job' training (most likely from an approved bank of accredited providers). It is not yet clear precisely how this will work. However the Government envisages that this will give employers more choice and control over the training offered to apprentices and ensure that standards remain consistently high.
Levy funding which is not used within two years will expire, making it available to other employers. However, the Government maintains that larger employers will 'get out more than they are putting in', through a system of Government 'top-ups' if they are 'committed' to the apprenticeship programme. There is, at the moment, a lack of clarity as to the definition of 'committed'.
A levy is already payable in my sector. Will my business have to pay another?
Current indications are that the apprenticeship levy will be payable across all industries and sectors. Current sector-specific levies (for example in construction and construction engineering) may continue to operate alongside the new general levy. Hopefully further detail about how existing levies will interact with the new charge will become available in coming months.
My business is too small to pay the levy. Will the new scheme affect us?
Even if your organisation is not large enough to pay the levy there are still major changes ahead. Employers of all sizes will have access to the new 'Digital Apprenticeships Service' which will provide online support and guidance to enable businesses to effectively manage their apprenticeship programmes and source relevant training. The Government has also indicated that smaller non-contributing employers will be able to access unused funds to finance their own apprenticeships (although it is uncertain at this stage whether this will come to fruition and exactly how it will be managed).
What do I need to do?
Even though the apprenticeship levy does not come into force until April 2017, eligible organisations will have to factor this significant additional cost into budgeting exercises that are taking place now. The introduction of the levy is also likely to have a major impact on how training is organised and funded within larger organisations going forward. You may need to 'step-back' and conduct a fairly high-level review of the skills required by your business. Where might you expand your training offering (either by recruiting apprentices or encouraging existing employees to take up apprenticeship training) to make the most of your levy payment?
Response to the apprenticeship levy amongst the business community has been very mixed. Whilst many applaud the Government's stated aim to boost the apprenticeship programme and encourage more young people into training, the imposition of a mandatory payment has been controversial. Indeed, the CBI has described the levy as a 'blunt instrument' and has expressed surprise at its size and scope.
It appears that employers will only be permitted to spend funds 'withdrawn' by way of 'digital vouchers' to purchase apprenticeship training (as opposed to general training for the wider workforce). This has given rise to concerns that many employers might try to 'rebrand' all employee training as apprenticeship training, diverting funds away from 'genuine' apprenticeship schemes and diluting standards. However, the Government has already taken steps to address this, for example by protecting the term 'apprenticeship' against misuse and rationalising the formal requirements of recognised apprenticeship schemes. Worries remain though that many employers may have no option but to reduce their investment in wider workforce training and development simply to offset the levy.
In some cases, the levy may lead to job losses or an overall decline in recruitment. This may well be the case for smaller businesses which fall just above the eligibility threshold and do not yet have resources in place to deal with the new charge. There is only so much money in the pot after all.
Many employers with strong internally developed training programmes have been highly critical of the proposal that levy funds can only be spent on 'off the job' training by an external provider. For example John Timpson, owner of the national chain of cobblers and key cutting stores, has stated that the scheme has 'introduced a new bundle of red tape' for his business and has announced he will stick to his own internally devised training scheme 'even if we pay the levy and get nothing back'. A call from the CBI to permit employers to spend levy funds on 'allowable expenses' (such as administration costs, capital investment and staff time) as well as training were rejected by the Government in its recent consultation response.
For large businesses (with large payrolls) running small, specialised programmes, the 0.5% levy may well be higher than the current cost of apprenticeship training. Many large businesses already value, and are engaged in promoting, apprenticeship but will still need to start thinking creatively about how to expand their apprenticeship offerings or risk losing out financially.
The Government's goal is that all sectors should pull their weight to develop apprenticeships. However the levy is likely to have a disproportionate impact in some areas. For example, as the largest employer in the UK, the NHS will be one of the biggest contributors but may stand to gain the least (as apprenticeship qualifications may not be sufficient or appropriate for a large proportion of the NHS workforce).
The apprenticeship levy is, to some extent, an unusual case as we have to hand the regulations that will implement the scheme before all the details of how the scheme will work have been 'firmed up'. The newly published regulations are highly technical and deal largely with tax-related rules. The Government consulted on the imposition of the levy in the summer of 2015 and most of what we know about the scheme is drawn from the official response to that consultation (published in November). However, many practical details of the scheme and the operation of the levy still remain hazy.
There is still a great deal of policy development work to be done before the levy is implemented and it is clear that many employers remain apprehensive about the mandatory charge. The Government is taking the boldest of steps to boost vocational training, but may still have some convincing to do to win round the business community.
Stuart Jones (firstname.lastname@example.org) is head of Employment, Pensions and Immigration at Weightmans LLP and is based in Liverpool.